Inventory Management Principles

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Questions and Answers

What action should be taken when the actual inventory is higher than the recorded amount?

Record the excess as an expense

Decrease the recorded inventory

Ignore the discrepancy

Increase the recorded inventory to match the physical count (correct)

In a perpetual inventory system, if the recorded amount is $500,000 and the physical count is $700,000, what is the inventory overage amount?

$1,200,000

$200,000 (correct)

$500,000

$700,000

What journal entry is required if the recorded amount is equal to the physical count?

Record an adjustment to increase the inventory

Record an adjustment to decrease the inventory

Record the physical count as an expense

No adjustments are required (correct)

How is inventory overage classified in accounting?

As other income Signup and view all the answers

Which statement is true regarding the recorded amount and physical count?

An adjustment is needed when the physical count is greater than the recorded amount Signup and view all the answers

What is the consequence of failing to adjust the recorded inventory when there is an overage?

Financial statements will be inaccurate Signup and view all the answers

Which of the following does not require a journal entry under a perpetual inventory system?

When the recorded amount equals the physical count Signup and view all the answers

What does an inventory overage indicate about a company's inventory management?

The physical count has been underestimated Signup and view all the answers

What does freight collect mean?

Freight that is paid by the buyer. Signup and view all the answers

What is the proper journal entry to account for freight collect?

Debit accounts receivable, credit accounts payable. Signup and view all the answers

How is the accounts payable total computed based on the provided data?

By adding purchases to the freight paid by the seller. Signup and view all the answers

What is the effect of the buyer paying the freight on cash?

It decreases cash balance. Signup and view all the answers

Which account is credited in the journal entry related to freight collect?

Cash. Signup and view all the answers

What is the total amount represented in the Accounts Payable?

$2,950,000. Signup and view all the answers

What happens to the accounts payable when the buyer pays the freight?

Accounts payable decreases. Signup and view all the answers

In the compound journal entry, which account reflects the purchase amount?

Accounts Payable. Signup and view all the answers

Which amount is included in the total accounts receivable?

$1,000,000. Signup and view all the answers

What is the primary purpose of the compound journal entry regarding freights?

To accurately reflect liabilities associated with purchases. Signup and view all the answers

What is the net sales if gross sales amount to P600,000, with sales returns of P50,000, sales allowances of P10,000, and sales discounts of P20,000?

P520,000 Signup and view all the answers

What would be the journal entry when the buyer pays after the expiration of the discount period for a purchase of P600,000 with terms 2/10, n/30?

Debit Cash P600,000; Credit Accounts Payable P600,000 Signup and view all the answers

If a buyer paid within the discount period for merchandise worth P500,000 with terms 2/10, n/30, what is the cash amount paid?

P490,000 Signup and view all the answers

What is the significance of FOB destination in transactions according to the content?

The seller is responsible for the shipment until it reaches the buyer. Signup and view all the answers

Which of the following journal entries correctly reflects a return of merchandise worth P5,000?

Debit Accounts Payable P5,000; Credit Merchandise Inventory P5,000 Signup and view all the answers

Which payment reflects the consequence of receiving a freight bill for a previous transaction?

A decrease in the cash account due to freight payment. Signup and view all the answers

If a bookstore sold merchandise worth P9,730 for cash, what effect would this transaction have on the company's financial statements?

Increase cash and decrease merchandise inventory. Signup and view all the answers

What is the primary purpose of conducting a physical count in the Periodic Inventory System?

To ensure accuracy of the recorded ending inventory Signup and view all the answers

What journal entry should be made when issuing a credit memo for returned merchandise worth P1,800?

Debit Sales Returns P1,800; Credit Accounts Payable P1,800 Signup and view all the answers

Which entry reflects the adjustment for the ending inventory in the Periodic Inventory System?

Merchandise Inventory 5,000,000; Income Summary 5,000,000 Signup and view all the answers

In which inventory system are adjusting entries for shortages made?

Perpetual Inventory System Signup and view all the answers

What circumstance necessitates adjustments in the Perpetual Inventory System?

When recorded inventory exceeds the physical count Signup and view all the answers

What must be done to the Merchandise Inventory account before entering the ending inventory?

Close the Merchandise Inventory account Signup and view all the answers

Why is there a need for a physical count at the end of the year even in the Perpetual Inventory System?

To correct any inaccuracies in the running inventory records Signup and view all the answers

Which statement is true about the adjustments made in a Periodic Inventory System?

Adjustments are made based on the physical count outcomes Signup and view all the answers

What is a key defining feature of the Periodic Inventory System?

Ending inventory is recorded only at the end of the period Signup and view all the answers

What does an inventory shortage of $100,000 indicate in a perpetual inventory system?

The recorded amount is greater than the physical count. Signup and view all the answers

What is the main difference between perpetual and periodic inventory systems concerning inventory shortages?

Periodic systems do not recognize inventory shortages. Signup and view all the answers

In a periodic inventory system, what is the purpose of conducting a physical count?

To determine ending inventory value. Signup and view all the answers

When the recorded amount is greater than the physical count in the periodic system, what adjustment is made?

Recorded amount is decreased to match physical count. Signup and view all the answers

How is an inventory shortage classified in the financial statements?

As part of other expenses. Signup and view all the answers

If the recorded amount is less than the physical count in a perpetual inventory system, what action is taken?

Recorded amount is increased to equal the physical count. Signup and view all the answers

What happens when a company fails to account for an inventory shortage?

The company's revenue will erroneously appear inflated. Signup and view all the answers

Which of the following statements is true regarding the treatment of inventory counts?

Only periodic systems require a physical count at the end of the period. Signup and view all the answers

Study Notes

Inventory Adjustment

Inventory overage is an accounting adjustment that occurs when the physical inventory count exceeds the recorded inventory balance in the accounting records.
Inventory shortage is an accounting adjustment that occurs when the physical inventory count is lower than the recorded inventory balance in the accounting records.
Inventory adjustments are necessary for perpetual inventory systems, as these systems constantly track inventory levels.
When an entity uses a periodic inventory system, the inventory is not updated from time to time, therefore the ending inventory needs to be updated based on a physical count.
Inventory shortage is considered an expense, and is recorded to the income statement.
Inventory overage is considered income, and is recorded to the income statement.

Physical Inventory Count in Specific Systems

In perpetual inventory systems, physical inventory count is used to verify the accuracy of the record. This helps identify discrepancies between recorded inventory and actual inventory.
In periodic inventory systems, physical inventory count serves as the primary source to determine the ending inventory balance.

Causes of Inventory Discrepancies

There are several reasons why discrepancies between the recorded inventory and physical inventory count may occur:
- Errors in recording purchases, sales, or returns
- Damage, theft, or spoilage of goods
- Mistakes in physical counting process

Inventory Adjusting Entries

Inventory adjusting entries are used to correct the inventory balance based on the physical count.
These entries are made at the end of an accounting period and can either increase (overage) or decrease (shortage) the inventory balance.

Inventory Shortage

The recorded amount is more than the physical count
Adjusting Entry for Inventory Shortage in a Perpetual Inventory System:
- Debit: Inventory Shortage – This reflects the amount of the shortage.
- Credit: Merchandise Inventory – This reduces the recorded inventory balance to match the physical count.
Adjusting Entry for Inventory Shortage in a Periodic Inventory System:
- Credit: Income Summary – This reflects the amount of the shortage.
- Debit: Merchandise Inventory – This reflects the updated ending inventory balance based on the physical count.

Inventory Overage

The recorded amount is less than the physical count
Adjusting Entry for Inventory Overage in a Perpetual Inventory System:
- Debit: Merchandise Inventory – This increases the recorded inventory balance to match the physical count.
- Credit: Inventory Overage – This reflects the amount of overage
Adjusting Entry for Inventory Overage in a Periodic Inventory System:
- Debit: Merchandise Inventory – This reflects the updated ending inventory balance based on the physical count.
- Credit: Income Summary – This reflects the amount of the overage.

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Description

This quiz covers key concepts related to inventory adjustments in accounting, including overage and shortage. Learn how different inventory systems, such as perpetual and periodic, manage physical counts and their implications on financial statements. Test your understanding of how these adjustments impact accounting records.